LANDLORDS TAKE HEED: important lessons in recovering possession of commercial property

You may or may not know that the Oxford English Dictionary defines furlough as “to give somebody permission to leave their duties for a period of time”.

In the press, we have seen increasing mention of ‘furlough fraud.’ It has recently been estimated that the UK Government is likely to write off £4.3 billion pounds in furlough fraud.

The High Court has recently handed down its judgment in the case of McDonalds Restaurants Limited v Shirayama Shokusan Company Ltd which has provided further clarity on how landlords can rely on section 30(1) (g) of the Landlord and Tenant Act 1954 (ground (g)).

Request for a new lease

What is furlough fraud?

Examples of furlough fraud could include:

McDonalds was the tenant of premises in County Hall, London. McDonalds issued a section 26 notice requesting the grant of a new lease from the landlord in December 2016. The landlord opposed the request, relying on ground (g). This enables a landlord to oppose a lease renewal if they intend to use the property (entirely or partly) for their own occupation.

• Furloughed staff being asked to continue to work;

Terminating McDonald’s tenancy

• Claiming furlough pay for staff who did not qualify for the scheme;

• Claiming furlough pay for ‘made up’ staff;

• Over-claiming furlough pay;

• Not passing the full amount of furlough pay to the furloughed employees;

In response to McDonalds’ section 26 request in 2016, the landlord made an application under section 29 of the Act seeking an order terminating McDonalds’ tenancy. The case came to trial in 2018 where the landlord stated its intentions to run a Japanese restaurant from the premises called ‘Zen Bento’ and gave an undertaking to the court to that effect. The judge was satisfied that the landlord had proved the required intention to occupy the premises for the purpose of carrying on their own business and McDonald’s were refused a new lease. McDonalds vacated the premises in February 2019.

• Deliberately providing false information to receive furlough pay from HMRC.

By November 2019 that the landlord had not opened ‘Zen Bento’ and appeared to be running a coffee shop/bakery, which was entirely different to what had been proposed in the 2018 proceedings.

While it is understood that only a very small minority intended to defraud HMRC, it is known that HMRC have started ramping up their investigations and actively following up on tip-offs received. Many business owners in the UK who had accessed

McDonalds subsequently sued the landlord on grounds of deceit and misrepresentation, claiming that its tenancy was terminated in 2018 because the landlord had misrepresented its intentions.

Satisfying ground (g)

A landlord must show that the purpose of occupancy is for their own business, which they will take up in a reasonable time after termination of the tenant’s tenancy.

Harriet

Senior associate

A landlord can change its mind after trial, leaving a tenant with no remedy, provided the landlord can show at the date of trial that the intention existed. However, a tenant may have a remedy if it can prove that the original intention never existed, and a misrepresentation was made to the court.

the furlough scheme to help retain their employees during the pandemic may receive queries from HMRC. These could even be in cases where only legitimate furlough claims had been made.

Help – I’ve had a query from HMRC show your intention of being cooperative, but will also help address any issues, without the need for escalation.

If a tenant’s claim is successful, the court may order the landlord to pay the tenant compensation under section 37A of the Act for damage or loss sustained as the result of the original order refusing the grant of a new tenancy.

Below are some practical tips to help you respond to any queries received.

Tip 1: Do not panic!

Satisfying the requirements of ground (g) can be quite a high threshold; a landlord must show a fixed and settled desire to do that which it intends to do, and that it has a reasonable prospect of being about to bring about that result.

Following the termination of McDonalds’ lease in 2018, there was a chain of emails from the landlord to an architecture firm containing plans for a new ‘grab and go’ restaurant, which was also emailed to another 88 individuals, who apparently were not connected to the landlord’s business.

Tip 3: Make sure you review your records and keep copies.

Further emails were sent pitching ideas for the premises ranging from a Michelin star restaurant to a Spanish restaurant.

The judgment

This will allow you to refresh your memory and more importantly have all your documents ready to disclose to HMRC if needed.

Tip 4: Be transparent.

For a claim of ‘deceit’ to succeed, the claimant must show:

1. a false representation made by the defendant to the claimant;

Understand that HMRC may be following up leads or simply asking questions to ensure that all claims made were done so properly.

2. the defendant knows that representation is false, or acts recklessly as to whether that is true;

Tip 2: Do not bury your head in the sand.

3. the defendant intends that the claimant’s actions rely on the false representation; and

The judge awarded compensation pursuant to s37A, but dismissed the claim in damages for the alleged deceit. The judge was satisfied that the landlord didn’t intend to occupy the premises to run ‘Zen Bento’ following the termination of McDonalds’ tenancy. It was accepted that the landlord intended to open a restaurant, but the plans were ‘up in the air’. The landlord had misled the court at the preliminary issue trial and compensation was awarded to McDonalds, which will be determined at a later trial.

In the event you realise that a mistake has been made, or any overpayments have occurred, make sure you promptly inform HMRC.

Tip 5: Keep records for a minimum of six years.

The claim of deceit was dismissed as the judge was not satisfied that the landlord intended for McDonalds to have acted in reliance on the misrepresentations. Rather, the judge felt the landlord had been attempting to mislead the court into making the termination order.

What can landlords learn?

4. the claimant does act in reliance on the misrepresentation and consequently suffers a loss.

Issues raised

While it is easy to get distracted in keeping the business running, it is important to understand that this is not going to go away. If you cannot find time yourself to engage with HMRC, then make sure you instruct an adviser who can do so on your behalf.

The judge made two observations. Section 37A doesn’t require misrepresentation to be deliberate or reckless, but it is difficult to see how an accidental misrepresentation could be made pursuant to ground (g). Additionally, to secure compensation under section 37A, the claimant must prove that the termination of the tenancy or the refusal to grant a new lease was as a result of misrepresentation or concealment of facts.

Even if you were successful in addressing any queries and the matter was subsequently resolved, do keep your records for a minimum of six years to assist you with any potential future queries.

The case highlights the complexities and nuances that a landlord must consider in attempting to oppose the grant of a new lease relying on ground (g). Whilst a landlord can change its mind regarding its intention for the property, a rapid change of course suggests that the original plan was untrue and thus McDonald’s claim under s37A succeeded.

We can help

It is often too easy to say that we ‘will deal with this later’ and soon enough a month or more has gone by. It is always better to be proactive and start engaging with HMRC as soon as possible. This will not only

In particular the judge noted that McDonalds had previously given an undertaking to the court that it intended to open a restaurant called ‘Zen Bento’.

Sheetul Sowdagar

Direct: +44 (0)20 7440 4806

Email: Sheetul.Sowdagur@russell-cooke.co.uk

Written by senior associate Harriet Allsop and trainee Louise Bonnici

Harriet assists businesses and individuals in managing and resolving disputes in relation to both commercial and residential properties. Get in touch via the contact information.

It goes without saying that if any actions are being taken against you by HMRC, please seek independent legal advice urgently. Contact our senior associate Sheetul Sowdagar in our professional regulation team, for help.

Want to build an ambitious partnership in the current corporate landscape? Please don’t do it because it feels as though it’s the ‘right thing to do’ or a responsibility to tick a box. Do it because you want to create a lasting legacy and make a difference whilst benefitting as a business.

The corporate landscape has changed over the last five years. We are all feeling the squeeze and recognise things are not going to improve in the short-term. With that, we need to approach fundraising more sensitively than ever while costs to our supporters continues to rise.

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Partnerships must be mutually beneficial and highly impactful. This means that by working together and helping to understand one another’s priorities, we agree on much needed solutions that we both benefit from.

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There are many ways to get involved, such as offering pro-bono support, or staff volunteering, sharing messaging, participating at events such as the London Marathon, having talks or training delivered by the charity, supporting campaigns, donating raffle prizes, making a donation or encouraging staff to fundraise and match fund their donations. The list is endless!

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Make a real positive difference today

If you recognise the value in supporting charities, start thinking about how your company can get involved. Think about the time you can give, the expertise you can offer and the impact you wish to make. Get your staff involved in recommending the charities you wish to work with and ideas on how you can work together.

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Working with charities is a great opportunity to give back to society, whilst creating a healthier, happier and engaged workforce with valuable connections within your local community. That’s why charity partnerships are so much more than just two organisations coming together in support of one another; it’s about making a positive difference and improving people’s lives.

Cerno ThamesWorkplace and Commercial Mediation Services